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Author: Mike Celeste Editor: Tony Ponzo September Circulation:

Stat Sheet Week Ending September 19th 2009

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow+215.0+2.2%+1,044.0+11.9%
S&P+25.0+2.4%+165.0+18.3%
NAS+52.0+2.5%+556.0+35.3%

Highlight of this past week: The Momentum Strategy has a good week and now sits on a 366% profit year to date.

In this Issue---
Options---
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We would like to point out a possible way to base your option strategy. Many people buy the same no. of contracts, but the price can vary quite a bit. When they vary and you make 10%, it could mean you are not getting the most out of your investment dollars. To make 10% on a $1.00 option gets you 10 cents profit. If you are doing 10 contracts, you make $100. If the option costs $.80 cents, you make 8 cents on a 10% gain.

That would be $80. Let's say you lose on the $1.00 play and win on the 80 cent play. You are a $20 loser. However, if you invest $1,000 on each and you win 10% and lose 10%, you are even. By dollar averaging you have a more accurate result of your overall play. Something to consider, especially since we are buying cheaper options toward the end of the expiration period. Check out your recent plays, if you are an option trader, and see which way comes out ahead for you.

Momentum Plays---
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We had a very good week with four trades - three wins and one loss. The one loss was small and we had an excellent win on a W play this week that netted us .40 in about 8 minutes. That was a 1.12 investment per share or $112. per contract. It was sold for 1.52 or $152 per contract making it a 44% gain. That's a great gain for a year's return but this was in minutes. Put another way, those who traded 10 contracts invested $1,120 and made $400. Those who traded 20 contract made $800. Those who got 30 contracts made $1,200 and so on. That's a pretty good payday for 8 minutes of work. These kinds of profit come on W plays but they have been a little scarce lately due to the way the market has been trading and due to the fact that the average daily swing on a lot of stocks have reduced. We look for an ATR (Average True Range) of $2.50. Now they are harder to find. So we may lower that range to $2.00 and go for a slightly smaller profit. We'll be testing that out over the next few weeks to see if we can increase the number of W Plays. We also get these nice size profits from earnings plays. Earnings season starts back in full in the middle of October and we'll be seeing a lot more of those plays again at that time.

This Strategy now sits on a 366% profit margin and like stated above we believe that the strategy will heat up even more starting in about the middle of October for the reasons mentioned. Take a look at our Past Results

Indicators---
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This has continued to be a very frustrating period for the Indicator play. There are times when we get few plays and there are times when it is almost a daily occurrence. Right now we are in the latter phase, with plenty of signals, but the market is so far out of the norm that we have had to cancel most plays. This past week we had 1 winning play, but we had a potential play every day, based on the signals. In fact, we have a signal for Monday, also. Fortunately, we have recognized that we are far out of the norm in market action and cancelled 4 of the plays--and doing so avoided stop losses. We can't say it enough--not losing is good; not as good as making a profitable play, but better than losing. There is virtually no one that has been in the market a long -period of time that is not absolutely puzzled over the strength of this market. Sometimes during this run we are able to make a quick in and out move, take our profit and run, and then watch the market resume its upward move. These signals have all been pointing to a down move, so with the market going up so much, we do see short dips that we can take advantage of--but if we don't get good strong support and resistance points, and see them hold for a bit (very important), we don't go in.

The Economy, The Markets & Commentary---
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This market has gone way past almost everyone's expectations. Take a look at the stats we show for the week and the year. In fact, at this point, valuation seems to be going out the window as a tool for investors to use. The belief now is that the market can't be stopped, or can it?---and that can be very dangerous. People that were brave enough to get into the market when it was making new lows are very nervous about what to do now. People that didn't get in, but had bailed out much earlier and are sitting on cash are very nervous, thinking that maybe they have missed the move. They have been looking for a correction and it hasn't come. Minor dips have come, but have quickly rebounded, with moves to higher levels. We keep saying that you shouldn't fight the tape, and the pendulum swings from one extreme to another. That means it is very, very difficult to short this market and it has been a losing move for those that have spent time trying, if they short and hold. We see no reason to believe that we have reversed directions this much and thus we are very cautious about our day trades, moving in and out as quickly as possible.

Let's take a minute and talk about politics and how it affects the markets. There are those that believe politics is not part of market moves. We believe just the opposite and when we bring up politics it is to talk about how it affects the markets rather than to give opinion of the politcal act itself. Politics is having so much influence in the markets( and had been doing it for a such a long time) that it isn't always Wall St. that moves the markets. Much of the time it is Washington, D.C. And that seems to be increasing these days. Let's take a short look at some things that show this to a very clear degree. We saw Barney Frank saying that 100% mortgage loans, with no proof of income, was not a problem. In fact, he thought more people should be allowed to get mortgage money. That was echoed by many in Washington. It also has to include politicians and bureaucrats that did nothing to prevent this policy. Then, when it all blew up in their faces, they had the nerve to say that they were unaware that there was a problem. We hammered about this for years--and we aren't at the top of the IQ chart. All you have to know is that 100% loans and no proof of income is a recipe for real disaster. That alone almost brought down the whole financial system--and we still don't know the total damage.

The repeal of the Glass Steagall Act---Before it was repealed there was a separation of banks from brokerage firms, and that guaranteed that "when Wall Street hits the wall, it doesn't cause the banks to do the same", as quoted by Barry Ritholtz, author of "Bailout Nation". That act was a major reason why the economy didn't come crashing down along with stocks in October 1987, he says. It isn't just him saying this, it was the intention of the GS Act to do just that. The reasoning was that if you allowed the banks and brokers to merge, it was another disaster in the making---and it proved to be so. Another political act, both the making of GS and the repealing of GS, and how it affected the market.

The Commodity Futures Modernization Act was repealed. It then allowed derivatives to be exempt from all the rules that affect every other traded financial instrument. So, what do we have in the oil futures contracts? We have 5-7% margin requirements instead of the 50% margin required in stocks. Again, political moves that affects the stock market. There was a huge increase in speculation of the oil contracts, far above what was needed to be hedged by actual users and suppliers of oil. To eliminate the problem, all we have to do is raise the margin to 50%, like the stock market--but do the politicians do it? Absolutely not. And so our gas at the pump is considerably higher than it should be.

Leveraging rules---They were modified and all of a sudden the investment powers were allowed to loan 50-80 times what they had in capital. Just think about that. If you have $1,000, you are allowed to loan $50,000-80,000, and that was all political--from allowing it, and then not seeing the absolutely powerful danger in doing that. Everything is fine when things are going up, like values in homes, but when they reverse, they collapse in a very big hurry. That is what brought about the Depression starting late in 1929, when the market collapsed. The leverage was 20-1 for stocks--5% margin. That was fine in a booming market, but in a dropping market, margin calls came fast and furious. Politics again showing how it affects the stocks.

The Healthcare Issue--continued---Now we have another political decision that is affecting the stocks. It was pointed out this week that the sector that is lagging this powerful move in the market is the health sector. The markets do not like uncertainty--and with this political firestorm it is no wonder that the health sector is not doing well. Last week when it was discussed, we didn't point out the connection to the stock market and investing. That was an oversight and I am correcting that now. I did point out that there are many obstacles to a plan being approved. There are 3 plans in Congress, and new plans being offered just about every day, along with modifications made to the original ones. I pointed out that if a plan does get approved, it will be done so fast that they will shove it down our throats before we know what it is about. I don’t' think we are going to get a good plan, if one is forced on us. I tried to mention that words point to good intentions, but that words don't usually end up being what actually happens. I pointed out that there hasn't been a political program anything close to this that ended up costing what the estimate said it would cost--a typical government move. That is a clear danger--no question about it. And in the long (or maybe short run) will have an affect on the markets. When every other time shows those kinds of results, it would almost put a successful program in the class of being a miracle. To be self sustaining and cause no increase in taxes is going up in the face of history--about 100% the other way, in fact. It would be nice if that weren't the case, but those are the facts. People opposed to Socialism have accepted Social Security (there, the words"social" and "security" are right there in the program), but everyone knows it is going broke. How can you get Social Security benefits that are more than what you put into the program, after adding on interest and expect that it will pay for itself? Most seniors get more in 1 year than they totally ever put into the program. Young people have seen the eligibility year raised, and there is a serious question of whether they will receive anything by the time they reach retirement age. People like to get benefits, and over the years, the politicians have increased the benefits--without providing income to pay for them. Medicare is a socialistic program, and it is welcomed big time by seniors, but it is so far underfunded that it, too is questionable as to how it can continue to be funded. We have seen these types of programs time and time again, and none--absolutely none that I know of--have been self sustained. The healthcare issue doesn't seem to be any different. A great vocal moderator is out there trying to tell us that this time it will be different---but the odds are extremely high that it is not possible.

Staying with the healthcare issue a bit longer, my partner pointed out something that hasn't been mentioned strongly enough. What is our greatest problem today? The economy is the major problem, not healthcare, and we think everyone agrees with that. Unemployment is reaching highs not seen since the Depression. Jobs and the loss of them is causing so many problems that it would seem that our leaders should be concentrating on righting that ship before going to healthcare or any other major issue, which is undoubtedly going to cost us when we can least afford it--now--let alone hoping beyond hope that there can be savings down the road.

There is lots of effort also directed to greening, which is raising costs (hardly ever mentioned, either), but is supposed to be good for us in the long run. China, which is advancing faster economically than we are, disregards most pollution and greening programs. We don't see reports of China proposing a major reform of healthcare and pollution issues---they have been hit with a slowdown of their growth rate, but they are concentrating on their economy. I'm definitely not saying we should ignore things to the extent that China does, but we were on the verge of a financial collapse and our economy is the worst since the Depression. It seems pretty logical that we should concentrate on the economy, first and foremost---we need people working. If they are working they can afford to pay their mortgage (if they qualify) and they will be spending consumers. You have a hard time spending if you don't have income from a job. And if people are working they will start buying more and that in turn will hlep to make companies healthier which eventually equates to a healthy stock market.

Yes, politics has just about everything to do with the stock market. And again, our intentions are to discuss how it relates to the markets rather than giving our opinion of the political act itself. Sometimes our opinion of an issue is going to bleed through in these writings but when that happens, we are in no way trying to convince our readers to lean one way or the other. We are human and as such, of course we have opinions.

Congress makes laws that affect stocks, plain and simple. Regulations are also made by the politicians and the government agencies--like the SEC (and most of the other agencies), whose people leave government employ and then work for the corporations that they used to regulate. We don't like it, but that's the way it has been, and it continues--no matter how much they say the agencies and politicians say they are not influenced by corporations that will later hire them, or by the influence of campaign donations on political decision making. We know this is happening, but the strange part is that incumbents get re-elected---almost without exception. It is a big battle when one retires and the office is up for grabs--watch the donations flow in then. People often hate politicians, and want them thrown out, but want to throw out the other district's elected people, not theirs. We get some pork thrown at us, and we think we should keep our man in.

Stay tuned..........interesting times.

Today's Thought---
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Successful investing is anticipating the anticipations of others.....Keynes

Mike

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